Title: Puzzles in financial development and economic growth

Authors: Ghimire Binam and Giorgioni Gianluigi
Institution: Liverpool John Moores University
Date: December 2008
Subject area(s): Economics
Relevance to other area(s): Finance, Public Policy
Project type: PhD thesis

Summary

Photo by: Rogiro, Creative Commons, Flickr. This work tests the robustness of two important puzzles regarding the relationship of financial development and economic growth documented in a number of recent papers. The first puzzle relates to the finding that banks have a positive effect upon economic growth in the long run but a negative one in the short run. The second is about the positive effect of stock markets upon economic growth irrespective of time horizons.

Datasets used

World Bank (2008): World Development Indicators (Edition: April 2008). ESDS International, University of Manchester.

The dataset covers the period 1970- 2006 for 121 countries. The authors believe this is the most up-to-date and comprehensive date sets currently available for bank and stock market related variables involving a large set of least developed and other countries.

Aims and objectives

This work aims to provide further empirical evidence by investigating the above mentioned two puzzles in the finance and economic growth relationship.

Methodology

This work uses recent development in panel data analysis (panel unit root tests, and tests for deciding the optimal method among pooled least squares, fixed and random-effects). The estimation techniques are ordinary, two stage and GMM. Test of joint significance is carried out by Wald test.

Results/Outcome

On the first puzzle, although our results provide further empirical support to a negative effect of banks’ development upon economic growth in the short run (annual data), they do not provide the expected evidence of a strong positive relationship for the long-run. On the second puzzle related to the impact of stock markets upon economic growth, we find that the sign of the relationship strongly depends on the variables chosen, the method of estimation and the possible role of self-selection bias.

Additional information:

Graph showing GDP per capita growth annual % from 1970-2007 for Country Groups: World, Lower middle income, High income: OECD and Least developed countries. Source Data: World Bank World Development Indicators, December 2008, ESDS International.

This is a working paper. Details can be obtained by contacting the author, Binam Raj Ghimire at: Liverpool Business School, Liverpool John Moores University, John Foster Building, 98 Mount Pleasant, Liverpool L3 5UZ, United Kingdom Tel. 0044 151 231 3592 E-mail address: B.R.Ghimire@2005.ljmu.ac.uk.

The paper in its full form is available in the working paper series of the Centre for International Banking Economics & Finance (CIBEF) at www.cibef.com.

Research presented as a poster at the 4th ESDS International Annual Conference which took place on 1st December 2008 at the Institute of Materials in London - see conference proceedings.